Standards-of-conduct package needs further clarification, they say
As the Securities and Exchange Commission mulls changes to its standards-of-conduct package proposal, trade associations in Washington are seeking further clarification while keeping an eye on states that are considering similar regulations.
Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, implored state officials at a press briefing last month to hold off on enacting further regulation with respect to the fiduciary duty of financial professionals until the SEC issues its final rule on its package, also known as Reg BI, which the agency said it will do by September.
"It really is not good policy to end up with a patchwork of rules in this area," Washington-based Mr. Bentsen said.
After the 5th U.S. Circuit Court of Appeals vacated the Department of Labor's fiduciary rule in March 2018, saying it represented regulatory overreach, officials in several states openly considered their own fiduciary standards. Legislators in New Jersey have started discussions on adopting a fiduciary standard for broker-dealers and in Nevada, law-makers passed a fiduciary duty law in 2017 but state regulators have yet to put forth details specifying what the new requirements will be.
"The states should really wait and see what the SEC does," said Kevin Carroll, SIFMA managing director and associate general counsel. "They should see what the contours of Reg BI are before undertaking their own efforts. Maybe Reg BI in its final form will answer all questions and issues the states were considering addressing."
Reg BI is one of three legs in the SEC's proposal approved in April. In the proposal, the best-interest standard compels brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts.
The proposal's client relationship summary, or Form CRS, necessitates that firms disclose to retail investors the nature and scope of their services, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm's disciplinary history.
Lastly, there's a proposed standard of conduct for investment advisers that states advisers have a duty to act and provide advice that is in the best interest of the client.
Michael S. Pieciak, commissioner of the Vermont Department of Financial Regulation and president of the Washington-based North American Securities Administrators Association, said states are getting tired of waiting for federal regulators to act. "States have long led investor protection initiatives, including passing the first securities laws in the country," he said. "Seeing insufficient federal action to address standards of care, some states are taking steps to implement state-based fiduciary duty standards for broker-dealers."
Mr. Carroll said SIFMA is not opposed to raising conduct standards, "but we want it done in a rational, uniform, 50-state, federal way rather than having 50 different standards to deal with."
During a comment period that ended in August, the SEC received more than 6,000 comments on the proposed package. With respect to the best-interest standard, the National Association of Government Defined Contribution Administrators, Lexington, Ky., is seeking confirmation on whether participants in defined contribution plans are covered. In its proposal, the SEC did not address whether DC plan participants, like public employees not covered by the Employee Retirement Income Security Act of 1974, would be considered retail customers, and therefore covered under the best-interest standard, NAGDCA stated in a comment letter.
"As they're making an effort to provide direction and clarity we wouldn't want to unintentionally have increased confusion," said Paul Beddoe, NAGDCA's government affairs director based in Washington.
David G. Tittsworth, a lawyer at Ropes & Gray in Washington and former president and CEO of the Investment Adviser Association, said it's likely the SEC will move on all three parts of the package simultaneously, rather than splitting them up.
The part Mr. Tittsworth said needs the most work is Form CRS. "From all the comments that have been received on CRS, I would say that the SEC needs to go back to the drawing board and come up with a simple, straight-forward but uniform device that will inform investors of the main points of the transaction or relationship that is being established, as well as the standard of care that applies," he said.
RAND Corp. conducted a survey on behalf of the SEC that was released in November in which 1,816 people were asked about Form CRS. On the positive side, nearly 90% said Form CRS would help them make informed decisions about investment accounts and services. However, "some people understood discrete sections of the Relationship Summary, but when questioned at the end of the interviews, they did not appear to have synthesized the information and be able to apply it," the study states.
After looking at the results, Karen Barr, president and CEO of the IAA in Washington, said the material was "clearly confusing folks."
"The form should be more streamlined, in plainer English and should leverage other robust disclosures that investment advisers already provide and that broker-dealers will be required to provide," Ms. Barr added.
The commission currently has four members as Democrat Kara Stein's term ended last month and her replacement has yet to be nominated. SEC Chairman Jay Clayton only needs three votes to pass a final rule on the package and Mr. Tittsworth said Mr. Clayton is under no obligation to wait for a full commission to move forward. Currently, there are three Republicans, including Mr. Clayton, and one Democrat on the commission.
But in Congress, Democrats this year have control over the House of Representatives and Rep. Maxine Waters, D-Calif., is chair of the House Financial Services Committee. In a September letter to Mr. Clayton, Ms. Waters and 34 of her Democratic colleagues said the SEC's package proposal "falls woefully short."
Ms. Waters could call hearings on the proposal but nothing has been publicly floated as of yet. "The Democrats taking over the House is not an insignificant development. It's a big deal," said Mr. Tittsworth. "It probably won't make much of a difference when you're talking about legislation because the Senate is more Republican than it was, but in terms of other powers that the Congress has, including oversight power, it is an enormous difference."
Mr. Tittsworth noted that when the DOL introduced its fiduciary rule during the Obama administration, House Republicans voiced their opposition and held several hearings on the issue, but the regulation eventually was issued anyway in 2016 before being vacated in the courts two years later.
"Ultimately, Clayton has the power of the gavel and he can say, 'We're going to consider these proposals,' and if he gets three votes, that's that," Mr. Tittsworth said.n